What Debates About International Trade and Competition Often Ignore

By Sarita D. Jackson 

Current US protectionist policy proposals respond to the idea that international trade harms the manufacturing sector. Such a response ignores the positive role that trade agreements and other special trade programs play in actually creating a level of competitive advantage for various industries in specific markets. The article examines how trade policies impact industry competitiveness internationally.  

 

Several US trade deals have been under attack for negatively affecting the US manufacturing sector in terms of its trade balance with the global market. The reason being is that production and employment have shifted to overseas markets with lower labour wages, which, in turn, results in lower production costs. In response, there have been calls for protectionist trade policies and withdrawing from signed trade deals, as in the case of the Trans-Pacific Partnership (TPP) agreement. The underlying argument behind these policy proposals is misleading, because it ignores those cases in which an industry many not be globally competitive but is highly competitive in specific markets.

For instance, China is the number one exporter of textiles to the global market. However, in countries throughout Central America and the Caribbean, such as the Dominican Republic, apparel manufacturers mainly import the more expensive US textiles. This trend leads to the following question: why are some industries, which are not globally competitive, highly competitive in specific markets, although lower costs suppliers from other countries exist? The answer cannot be found in commonly accepted market and firm-based explanations alone. Instead, it is worthwhile to acknowledge other factors such as: 1) historical trade rules set under trade preference programs and trade agreements and 2) bargaining power within a trade relationship (Jackson 2016).1

The increase in the number of US trade deals from only two by the 1990s – US-Israel free trade agreement (1985) and the North American Free Trade Agreement (NAFTA) (1994) – to 14 agreements with 20 countries demonstrates the significance of these rules in shaping competitiveness. If market conditions and firm strategy were the key factors that determined an industry’s ability to compete in general, then trade programs and agreements would not be important. However, through the use of special duty and quota-free market access, these trade programs and agreements provide a competitive advantage that an industry probably would not enjoy in any given market.

Industry competitiveness is measured by market share. In the case of textiles, the United States exported $14 billion worth to the world in 2015, which makes it the fourth top exporter to the global market. The US share of the global textile export market reached 4.8%, a decline from 7.1% in 2000, according to a 2016 World Trade Organization report. US operator costs per hour reached slightly under $20 in recent years.

The increase in the number of US trade deals from only two by the 1990s — US-Israel free trade agreement (1985) and the North American Free Trade Agreement (NAFTA) (1994) — to 14 agreements with 20 countries demonstrates the significance of these rules in shaping competitiveness.

China, on the other hand, is the number one exporter of textiles to the global market. In 2015, China exported $109 billion worth of textile to the global market. China accounts for 37% of textile exports to the world, a large increase from only 4.6% in 1980. Per a 2015 Werner International report, Chinese operator costs reached almost $3 per hour.

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Market-based models, which include a focus on cost-competitiveness, would assume that apparel manufacturers in the Dominican Republic, for example, would purchase most of their textile inputs from the lower cost suppliers in China. However, an opposite outcome emerges upon examination of Dominican apparel sourcing behaviour, as well as that of apparel manufacturing throughout the rest of the Caribbean Basin.2 In 2015, the Dominican Republic, a top Caribbean Basin apparel exporter to the United States, imported 60% of its textiles from the United States compared to only 12% from China. More specifically, the US share of Dominican textile imports of cotton (HS 52), man-made staple fibres (HS 55), and knitted or crocheted fabrics (HS 60) ranged from 58% to 74%. China led in the specific textile category of wool, yarn, and woven fabric (HS 51)3 with a 73% share of Dominican imports of this item.

The US competitive advantage in the Dominican textile market goes as far back as the 1980s. In 1986, President Ronald Reagan established a Special Access Program known as 807A or Super 807, which refers to the tariff code provision under the Tariff Schedule of the United States that provides Guaranteed Access Levels (GALs) to Caribbean Basin producers. The GALs afforded Dominican apparel manufacturers special access to the US market in the form of higher quotas than originally allowed under its predecessor, 807. The duty-free provision of 807 remained under 807A. The ability to export a greater amount of apparel duty-free to the US market was quite significant for Dominican producers, because textile and apparel exports from developing to developed countries faced strict quotas under the 1974 Multi-fibre Arrangement (MFA).

Simultaneously, US textile producers benefitted from this special access program, because the GALs required the use of US formed and cut fabric in Dominican apparel in order for Dominican producers to enjoy unlimited quotas altogether. At the same time, the GALs did not provide US textile producers with duty-free access to the Dominican market. Nevertheless, the GALs created an incentive for Dominican apparel manufacturers who sought access to the US market to purchase mainly US textiles.

Another program established in 2000, the Caribbean Basin Trade Partnership Act (CBTPA), expanded US textile’s access to the Dominican apparel market and enhanced the benefits to Dominican apparel exporters to the United States. The CBPTA granted Dominican apparel exports to the United States duty-free access, provided that these exports consisted of US-cut fabric and, now, US yarn. Two years later, the Trade Act of 2002 added textiles dyed in the United States to the list of required inputs.

Following the implementation of these unilateral special access programs, US textile exports to the Dominican market increased from $75 million in 1993 to $464 million in 2003. Furthermore, US share of Dominican imports of textiles increased from 44% in 1993 to 81% in 2003.

The rules within the aforementioned trade programs, as well as the decision to reauthorise their benefits, are made by the United States. Therefore, the United States, a key trading partner for the Dominican Republic, has the power to shape the textile and apparel trade relationship between the two countries.

Another set of rules were established in 2004 when the Dominican Republic signed a trade deal with the United States, which became a part of the US-Central American Free Trade Agreement and is currently known as the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA). Unlike the aforementioned trade access programs, the DR-CAFTA is a reciprocal trade agreement, in which all member countries enjoy duty and quota-free access to each other’s markets. For example, US textiles also enjoy duty-free access to the Dominican Republic and five Central American (Guatemala, El Salvador, Honduras, Nicaragua, and Costa Rica) markets. Additionally, apparel exports from the Dominican Republic and the five Central American countries can enter the US market duty-free, provided that they consist of textiles from DR-CAFTA member countries, not just the United States. Furthermore, DR-CAFTA is an agreement that emerged from formal negotiations between the United States, the Dominican Republic, and the participating Central American countries and was approved by the legislative branches in all seven countries. Following the signing of DR-CAFTA, US textile exports to the Dominican Republic actually dropped from $552 million in 2004 to $437 in 2015. The US share of Dominican textile imports decreased from 80% to 60% during the same period. Nevertheless, US textiles continue to account for the majority of Dominican textile imports.

The case of US-Dominican textile and apparel trade illustrates the importance of political economic factors in determining industry competitiveness in particular markets. 

DR-CAFTA still exemplifies how these rules and bargaining power shape the ability for a country’s industry to be highly competitive in specific markets, albeit, not globally competitive. For instance, even with an emphasis on reciprocal treatment within DR-CAFTA, US textiles continue to dominate Dominican textile imports. This reality is due to the fact that the Dominican textile industry remains underdeveloped as a result of long-term incentives to purchase and use US textiles.

Whereas the actual DR-CAFTA textile and apparel rules involved negotiations between the United States and the Dominican Republic, negotiators for the latter country had minimal bargaining leverage. The US-Dominican trade talks involved a process referred to as “docking” onto the Central American agreement. A 2004 US Government Accountability Office report reads, “Although CAFTA will require 1 year to complete, the USTR [Office of US Trade Representatives] expects that docking the Dominican Republic onto the agreement will take considerably less time.” In other words, the rules as they apply to textile and apparel trade between the United States and the Dominican Republic are very similar to the earlier rules established between the five Central American countries and the United States. Therefore, little room existed for an in-depth negotiation, even though many Dominican producers preferred more flexible rules that would allow them to purchase yarn and fabric from lower cost manufacturers anywhere in the world. The Dominican Republic moved forward with DR-CAFTA, since the main focus of its apparel exporters was to maintain special access to the US market in the face of increased and fierce competition from China. By this time, China had joined the World Trade Organization and the MFA textile and apparel quotas were set to expire by January 1, 2005.

In sum, historical trade rules set by special access trade programs and agreements as well as bargaining power shape the decisions of importers in different markets. As a result, regardless of an industry’s ability to compete globally, exporters enjoy a competitive advantage that has been created in specific markets. The case of US-Dominican textile and apparel trade illustrates the importance of political economic factors in determining industry competitiveness in particular markets. Incorporating these factors into foreign trade policy discussions have the potential to lead to a more effective strategic approach to providing firms and industries with the 21st century tools that they need to compete in specific markets around the globe.

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About the Author

Sarita D. Jackson, Ph.D. is the founder, president and CEO of the Global Research Institute of International Trade (GRIIT), a think-tank/consulting firm emphasising trade policy analysis and advising businesses on using these policies to compete in the international market. Dr. Jackson also teaches business courses in the Department of Business, Management, and Legal Programs at UCLA Extension and in the Jack H. Brown College of Business and Public Administration at California State University San Bernardino. Her book, It’s Not Just the Economy, Stupid! Trade Competitiveness in the 21st Century, was published in 2016 by Cambridge Scholars Publishing.

Reference

1. Jackson, S. D. (2016). It’s Not Just the Economy, Stupid! Trade Competitiveness in the 21st Century. United Kingdom: Cambridge Scholars Publishing.
2. Caribbean Basin is a term used to describe the Central American and Caribbean countries that are eligible to receive the benefits offered by the Caribbean Basin Initiative (CBI), a piece of legislation implemented in 1984 to provide preferential access to the US market for select goods. Textile and apparel were not included in the CBI.
3. HS refers to the Harmonized System, which sets an international classification standard for products and is used to determine import duty rates in countries around the world.